RMG sector faces new challenges
Wednesday, 22 August 2007
Ahmed Showkat Masud
THE readymade garment (RMG) sector in our country that started its journey about two decades has been playing a pivotal role in the national economy, in terms of both providing jobs and as foreign currency earner.
The volume of exports increased by 16 per cent in fiscal year (FY) 2006-2007, led by RMG sector despite several months of political turmoil and labour unrest along with anarchy and vandalism by some vested quarters that led to ransacking of approximately 100 factories in and around the capital city of Dhaka.
Though the volume of export increased in fiscal 2006-2007 substantially, the overall prices fell by approximately 1.0 per cent in RMG sector from those of the previous fiscal -- FY 2005-2006.
Export growth was over 20 per cent until March, 2007 but started to decline from April, 2007. As stated by some of the owners of the RMG factories, some influential buyers have started bargaining over prices against their orders (export LCs and sales contracts). Already the profit margin of the garment factories has declined substantially. If the buyers offer lesser unit prices against exports, the factories, mainly those who are dependant on buying houses, will be vulnerable. Because, commission of the buying houses will reduce the profit margin substantially. Some buying houses charge commission up to 5.0 per cent of export LCs/ contracts' values. Servicing interest payments against back to back LCs and receiving export proceeds after deduction of various charges, the exporters can hardly earn 13 per cent to 14 per cent profit over the value of export items. If the exporters have direct contacts with buyers, then the profit margin ranges between 18 per cent and 19 per cent. Since, the competition in the global market place has increased, the buyers are taking chance. Our RMG exporters are, thus, being compelled to collect orders at lower prices so that they can, at least, run their factories.
Growth of bank credit flow declined significantly during the second half of the last year despite the fact that there was surplus liquidity with the banks. The reduction of volume of import has been one of the major causes for this. Adverse global market conditions and changed political situation were the reasons for the importers remaining not fully active. On the other hand, growth of export has started to decline since last April. It has negatively impacted the credit flow. Banks are being compelled to make payment of back-to-back LCs that were opened three to four months back. If the banks make payments by debiting their clients' foreign currency accounts, they will not have enough foreign currency to meet day-to-day operational expenses, particularly of the factories. A good number of RMG factories are facing this problem. Because, for the last couple of months they did not receive any orders from the buyers. This has also created a problem for banks. Many factories have now under-utilised capacity, facing acute liquidity crisis.
Buyers from the European Union (EU) and the US are more conscious about compliance issues. The major criteria for buyers' compliance are implementation of minimum wages, payment for overtime, maternity leave facility with payments, festival allowance and annual leave, weekly holiday, arrangement of fire extinguishers, etc.
In this connection our RMG sector can adopt total quality management (TQM) system to face the compliance issues of the buyers and endeavour seriously to supply the quality products at lower costs. Under competitive conditions in global market place with trade liberalisation efforts continuing, the hard reality is that customers (buyers) have now a wide range of choices. Our RMG exporters have to listen to the voices of the customers in order expedite the process of initiatives for quality improvements of their products. There is also a need for instant translation of new designs into finished products with zero defects. Production, marketing, finance, commercial, administration, design, research and development (R&D) etc., functions that can be consider as a process that is designed to satisfy buyers needs. Functions of all departments will have variations for meeting the needs of the time. The variations in such functional roles that are required will have to be identified for making coordinated efforts to improve the whole manufacturing process of an unit. Controlled and coordinated process will be there for continuous and never-ending improvements. Here, this never-ending continuous process, embracing all the functional departments of the manufacturing unit is the TQM system that is aimed at the requirements of the customers (buyers), empowering the employees and workers, achieving higher revenues and lowering costs.
It was earlier feared that in the post-Multi-Fibre Arrangement (MFA) era, our RMG sector will lose its market to other fabric producing countries. But situation has proved to be different, our export earnings from RMG products have recorded a significant growth after the phase-out of the MFA. However, the challenges still remain. Here continuous quality improvement through TQM system will be of utmost importance for the sector to upgrade the quality of its products and produce them at lower expense than before. That will be a critical factor for the outcome of our efforts to ensure a substantial growth of the RMG sector.
(The writer works with ONE Bank Ltd., at Khatunganj Branch, Chittagong)
THE readymade garment (RMG) sector in our country that started its journey about two decades has been playing a pivotal role in the national economy, in terms of both providing jobs and as foreign currency earner.
The volume of exports increased by 16 per cent in fiscal year (FY) 2006-2007, led by RMG sector despite several months of political turmoil and labour unrest along with anarchy and vandalism by some vested quarters that led to ransacking of approximately 100 factories in and around the capital city of Dhaka.
Though the volume of export increased in fiscal 2006-2007 substantially, the overall prices fell by approximately 1.0 per cent in RMG sector from those of the previous fiscal -- FY 2005-2006.
Export growth was over 20 per cent until March, 2007 but started to decline from April, 2007. As stated by some of the owners of the RMG factories, some influential buyers have started bargaining over prices against their orders (export LCs and sales contracts). Already the profit margin of the garment factories has declined substantially. If the buyers offer lesser unit prices against exports, the factories, mainly those who are dependant on buying houses, will be vulnerable. Because, commission of the buying houses will reduce the profit margin substantially. Some buying houses charge commission up to 5.0 per cent of export LCs/ contracts' values. Servicing interest payments against back to back LCs and receiving export proceeds after deduction of various charges, the exporters can hardly earn 13 per cent to 14 per cent profit over the value of export items. If the exporters have direct contacts with buyers, then the profit margin ranges between 18 per cent and 19 per cent. Since, the competition in the global market place has increased, the buyers are taking chance. Our RMG exporters are, thus, being compelled to collect orders at lower prices so that they can, at least, run their factories.
Growth of bank credit flow declined significantly during the second half of the last year despite the fact that there was surplus liquidity with the banks. The reduction of volume of import has been one of the major causes for this. Adverse global market conditions and changed political situation were the reasons for the importers remaining not fully active. On the other hand, growth of export has started to decline since last April. It has negatively impacted the credit flow. Banks are being compelled to make payment of back-to-back LCs that were opened three to four months back. If the banks make payments by debiting their clients' foreign currency accounts, they will not have enough foreign currency to meet day-to-day operational expenses, particularly of the factories. A good number of RMG factories are facing this problem. Because, for the last couple of months they did not receive any orders from the buyers. This has also created a problem for banks. Many factories have now under-utilised capacity, facing acute liquidity crisis.
Buyers from the European Union (EU) and the US are more conscious about compliance issues. The major criteria for buyers' compliance are implementation of minimum wages, payment for overtime, maternity leave facility with payments, festival allowance and annual leave, weekly holiday, arrangement of fire extinguishers, etc.
In this connection our RMG sector can adopt total quality management (TQM) system to face the compliance issues of the buyers and endeavour seriously to supply the quality products at lower costs. Under competitive conditions in global market place with trade liberalisation efforts continuing, the hard reality is that customers (buyers) have now a wide range of choices. Our RMG exporters have to listen to the voices of the customers in order expedite the process of initiatives for quality improvements of their products. There is also a need for instant translation of new designs into finished products with zero defects. Production, marketing, finance, commercial, administration, design, research and development (R&D) etc., functions that can be consider as a process that is designed to satisfy buyers needs. Functions of all departments will have variations for meeting the needs of the time. The variations in such functional roles that are required will have to be identified for making coordinated efforts to improve the whole manufacturing process of an unit. Controlled and coordinated process will be there for continuous and never-ending improvements. Here, this never-ending continuous process, embracing all the functional departments of the manufacturing unit is the TQM system that is aimed at the requirements of the customers (buyers), empowering the employees and workers, achieving higher revenues and lowering costs.
It was earlier feared that in the post-Multi-Fibre Arrangement (MFA) era, our RMG sector will lose its market to other fabric producing countries. But situation has proved to be different, our export earnings from RMG products have recorded a significant growth after the phase-out of the MFA. However, the challenges still remain. Here continuous quality improvement through TQM system will be of utmost importance for the sector to upgrade the quality of its products and produce them at lower expense than before. That will be a critical factor for the outcome of our efforts to ensure a substantial growth of the RMG sector.
(The writer works with ONE Bank Ltd., at Khatunganj Branch, Chittagong)